China vs the World

Why the Battle for New Trade Status is Such a Huge Deal

MetalMiner Editorial Team

Dan Simmons has seen a lot during the 38 years he’s worked at U.S. Steel’s Granite City Works in Illinois, just outside St. Louis.

From starting out as a general laborer, to swinging hammers on the track gang, to “feeling like Mr. Haney from Green Acres” while trucking around the mill, Simmons took it all in. There were days “you were whistling when you came in, and whistling when you left,” he said.

But nothing compares to what he’s seeing now.

“I have grown men coming into my office, crying,” said Simmons. “You see the pain, the ‘what ifs,’ the blank stares…”

Simmons, who just turned 56, is now the president of the United Steelworkers Local 1899, and some of the grown men coming to him are pipefitters just like he had become during his long tenure, which began in 1978.

However, those men and women aren’t coming to him because they’ve been hurt on the job. They are coming to plead for help, because they have lost their jobs, and in many cases still don’t know when they’ll land their next one.

Cyclicality in steel production is nothing new, but it wasn’t until 2008 — when the global markets began crashing — that USS Granite City Works endured its first indefinite idling in its history.

Source: Taras Berezowsky/MetalMIner

The latest idling of the mill has hit residents of Granite City — and the surrounding region — very hard.

“We had the unemployment office cycling 400 people through at a time,” Simmons told MetalMiner. “The biggest fear is not knowing. If I could have given them a definitive timeframe, they would’ve said, ‘OK, I can handle that.’ But after two to three months, people come to me and don’t know what to do with themselves.”

Simmons knows what it’s like to feel that fear firsthand. “I got a brother that works here, a brother-in-law that works here, so it’s personal. You worry about where your whole family will be.”

So what’s different today, compared to 2008?

For Simmons and scores of others in the country’s steel sector and other manufacturing industries, much of the pain can be traced back to one main source: China.

A History of Unfair Trade?

The world may have never encountered a more crucial Year of the Monkey than 2016.

That is, at least as far as global trade between China and the Western world is concerned. At the end of this year, China believes it ought to receive Market Economy Status (MES). This would allow China to enjoy the same market status as the U.S. and European Union when it comes to anti-dumping investigations before the World Trade Organization.

In its quest to grow its economy over the past two decades, China has become the leading producer — by far — of steel, aluminum, cement and other industrial materials.
Because of this, global steel overcapacity has now reached upwards of 700 million metric tons. China's aluminum production has increased from 11% of global output in 2000 to more than 50% today. And imports of paper from China nearly tripled from 2012 to 2014, from 23,600 metric tons to 62,400 metric tons, with eight uncoated paper mills having closed or are in shutdown, according to Scott Paul, president of the Alliance for American Manufacturing (AAM), in recent Congressional testimony.

However, since China’s economy — and the role of its government within it — operates differently than much of the rest of the world, that country is effectively able to export and offer its products much more cheaply to many of its trading partners. Depending on the circumstances, this has spurred allegations of “dumping” over the past several decades, and has now come to a head.

Currently, China is considered a ‘non-market economy’ under WTO rules. Achieving market economy status would ultimately put China on the same level as the U.S. and E.U. in the eyes of the WTO, taking what some already consider a global trade war to new heights.

That last point is what has stirred up controversy. A change in status would impact Western manufacturers as well as importers, distributors and several other parties on many levels. It could put the final nail in the coffin of entire industries, such as U.S. furniture-making. In part, the controversy has become all the more heated due to countless allegations — in the form of trade cases and other trade complaints and disputes — levied by the US and EU against China since its accession to the WTO in 2001, essentially maintaining that China does not yet operate as a market economy.

In China’s defense, after being battered by falling demand and corresponding growth levels the past few years, the country is struggling to deal with supporting its developing economy — and its citizens. According to the Wall Street Journal, job protection is the government’s key concern, with the primary aim of “maintaining social stability,” according to a provincial Department of Finance official who spoke to the WSJ.

American Furniture Industry Still Standing?

The country’s key tool for that has been to over-produce products such as steel and aluminum, and since Beijing’s plan to shift to a consumption-led domestic economy has cooled lately, those products make their way into China’s export market.

That’s why in 2014 alone, China was the subject of 55% of all global anti-dumping investigations.

The main driver behind the dumping claims is essentially the role China’s government plays in influencing the country’s economy, and — many say, unfairly — subsidizing industries to be more competitive with those of their trading partners. China also stands accused of outright theft of intellectual property from some U.S. companies.

In other words, many parties are concerned that China’s foreign trade actions, and how they reflect the interplay between its government and its domestic economy, may belie Beijing’s insistence that the country has outgrown its non-market economy status.

Let’s Define a ‘Market’ vs. ‘Non-Market’ Economy

Broadly speaking, the definition of a market economy implies that

Prices are determined by supply and demand through free competition

Investment decisions, production and distribution are also determined by supply and demand

Economic decisions and price decisions involving goods and services are conducted by a country’s citizens — not the government

The NAFTA countries — Canada, Mexico and the U.S. — are classified as market economies.

This contrasts starkly with a centrally planned economy, in which the government shapes and controls everything from costs, prices, wages, output quotas, the value of its currency and more. The former Soviet Union and China are both prime examples; these are considered “non-market” economies (NME).

After the collapse of the Soviet Union in 1991, former satellites moved from centrally planned to market economies, formally becoming transition economies.

In the immediate years after the WTO came into being in 1995, 10 more transition economies became members, recognizing special treatment in their protocols of accession.

Here’s Why Everyone is Talking About China and Market Economy Status Now

China has the opportunity to be treated fully as a market economy since accepting its Protocol of Accession and becoming a WTO member on December 11, 2001.

By The White House from Washington, DC (P092310PS-0253) [Public domain], via Wikimedia Commons

Premier Wen Jiabao, seen here shaking hands with President Obama, guided China as a new WTO member from 2003-2013.

Because of the way China’s Communist government operated at the time, the protocol established the “governing process in granting China WTO status.” According to this E.U. policy analysis:

China committed to adhering to the rules and obligations of the WTO system, which is based on market economy principles, and to the WTO's policies of pro-competition and non-discrimination; to granting market access for imported goods and services; and to promoting a transition towards a 'socialist market economy.’

Since China’s 2001 accession, countries such as those comprising NAFTA have treated China as a non-market economy in anti-dumping cases due to the Chinese government’s influence in economic enterprise.

However, based on the Accession Protocol’s language, China maintained that after December 11, 2016, it would automatically achieve MES due to the expiration of one particular clause within the protocol. The interpretation of the language within that specific section is at the heart of the dispute.

Here's The Meat of the Debate

How the Non-Market Economy (NME) Methodology Works

Basically, non-market economies pose a problem when it comes to appropriately determining the margins used to compensate for products unfairly dumped into another market.
This is mainly because the two factors used for purposes of comparison — the exporting country’s “home” prices, and its costs of production — are both too skewed in a non-market economy due to heavy governmental involvement. Using either would lead to inaccurately calculated margins.

Therefore, under the General Agreement for Tariffs and Trade (GATT), it was agreed to construct the home market price on the basis of prices from a “third country” — in essence, a similar country with a market economy. The Tokyo Round of 1979 incorporated this component into the GATT, after which it got wrapped into U.S. law, according to this study.

Since the early 1980s, the U.S. Department of Commerce has applied this NME methodology for purposes of calculating anti-dumping margins in cases involving China. Will it be applying a different methodology to China cases come December?

The Legalese at Play: It All Hinges on ‘Price Comparability'

In order for China to join the WTO as a member in 2001, all negotiating parties (including China) agreed to a different standard in that country’s Protocol of Accession regarding anti-dumping investigations.

As part of China’s promise to move toward fully becoming a market economy, that standard required China to demonstrate “that market economy conditions prevailed in the industry producing the product under investigation,” and, if it couldn’t, the importing country could compare prices or costs based on an economy of similar economic development to China — rather than Chinese prices and costs.

The exact language resides in Section 15 of the Accession Protocol:

) In determining price comparability under Article VI of the GATT 1994 and the Anti-Dumping Agreement, the importing WTO Member shall use either Chinese prices or costs for the industry under investigation or a methodology that is not based on a strict comparison with domestic prices or costs in China based on the following rules:

) If the producers under investigation can clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product, the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability;

) The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product.

Here’s the kicker: China’s argument for achieving automatic market economy status hinges on one specific sentence in Section 15, which states that “in any event,” the second provision above “shall expire 15 years after the date of accession” — that is, on December 11, 2016.

Certain legal experts argue that based on a plain reading of the protocol language, this will not happen. Attorneys at Wiley Rein LLP, a firm based in Washington, D.C., argue on the grounds that if this was to be the actual ‘intent of the law’ as written, then the rest of Section 15 would be nullified. Based on the length of these types of WTO negotiations and the ways in which treaties such as this one are meant to be interpreted, this expiration is not likely to happen.

Others note that based on the language, WTO “member countries, including the NAFTA countries, can continue to apply the NME methodology (or similar ones) until China (or Chinese producers) can demonstrate that it operates under market economy conditions.”

Therefore, the debate boils down to…

The interpretation of the WTO Accession Protocol, specifically Section 15

The ability of the Chinese government and/or producers to prove market economy conditions prevail for a particular producer, industry or the economy as a whole

How each individual WTO member’s national law allows for China to become a market economy

Government subsidies at local and state levels have also given Chinese companies a leg up on global competition. According to the World Bank and other bodies, China and its government continue to eschew market economy conditions. For example, land prices in particular are subject to comprehensive government control, causing fundamental distortions in land prices in China.

“Because all local governments are the owners of urban land in their jurisdiction, they have strong incentives to supply cheap land for industrial use to generate economic growth,” according to a World Bank report.

Not only that, Chinese state-owned enterprises and how they operate are a cause for concern. Indeed, according to a recent Wall Street Journal analysis of nearly 3,000 domestic-listed Chinese companies in 2015, “reported government aid rose to more than 119 billion yuan, or more than $18 billion, last year compared with about 92 billion yuan in 2014.”

China’s Tianjin Pipe Corporation (TPCO) is one such example, with an operation outside Corpus Christi, Texas. According to Tim Brightbill, partner at Wiley Rein, these Chinese companies get preferential capital and other government subsidies to set up steel mills; or, if they don’t get subsidized initially, two years after starting production they begin operating on preferential treatment such as being less subject to regulation, not being traded on stock markets, and enjoying a different ownership structure.

Philip Bell, president of the Steel Manufacturers Association, noted back in 2015 that when the Texas branch of Tianjin Pipe Corporation applied for membership in that U.S. trade association, and was subsequently informed that SMA only accepted companies whose business was entirely market-based, TPCO responded that the U.S. operation was market-based while “traditionally Chinese.”

SMA did not admit the producer.

Can U.S. Textile Industry Ever Come Back?

China’s official line on market economy status is evident from China Foreign Ministry Spokesperson Hong Lei’s statement in a recent press conference: “China has been working faithfully to fulfill its obligations as a WTO member since its accession.”

Although China has made comparatively small strides recently, such as agreeing to stop steel export subsidies for some of its small companies after receiving pressure from the U.S. Trade Representative’s office, the country may have a long way to go to prove it operates as a market economy.

Who Decides Whether China Gets Market Economy Status?

With all the talk surrounding the WTO’s role in China market economy status, it is up to individual countries’ governments to make the MES decision.

Certain WTO member countries have already granted China MES, largely through existing trade agreements. However, the countries that have filed the most anti-dumping cases are the ones that will likely make a decision this year on market economy status.

Politically and economically, the E.U. (collectively China’s largest trading partner) and the U.S. are seen as the most important decision-makers. Many experts say the E.U. may make its final decision before the U.S.

In fact, on May 12, the European Parliament voted overwhelmingly to reject MES for China, which is a significant step in getting the European Commission and E.U. governments to do the same later this year.

Although the U.S. currently treats China as a non-market economy, U.S. law allows an entire country, producer or industry to “graduate” to market economy status and, in China’s case, to show why Chinese prices or costs should be used for dumping comparisons.

The U.S Decision – Six Criteria to Say Yes to MES

U.S. law requires the International Trade Administration, under the U.S. Department of Commerce, to consider six criteria in determining if a country has achieved market economy status:

The extent to which the currency is convertible into the currency of other countries,

The extent to which wages in the country are determined by free bargaining between labor and management,

The extent to which joint ventures or other foreign investments are permitted,

The extent of government ownership or control of the means of production,

The extent of government control over the allocation of resources and over the price and output decisions of enterprises,

Other factors considered appropriate by the administering authority.

However, “no one has asked Commerce to look at the question yet,” Tim Brightbill told MetalMiner. A formal request to consider China a market economy must explicitly come up in a new U.S. trade case for the Commerce Department to begin the process, according to Brightbill — essentially it can be any anti-dumping case in which China is a respondent. A Chinese company, for example, could raise the question within a new case or an existing one, knowing that a final decision won’t come for several months. This is likely, as MES is “a No. 1 priority for China right now,” Brightbill said.

According to Scott Paul, AAM’s president, his conversations with the Commerce Department so far make him optimistic. “I think we’re in a pretty good place,” he said. “I have no reason to believe that the administration has proactively decided to initiate granting China market economy status.”

Based on those conversations, “they have a deep understanding of the six criteria,” he said. Representatives from Commerce and the International Trade Administration have not responded to MetalMiner’s requests for comment on this issue.

The Latest Timeline for the MES Decision

The U.S. International Trade Administration will be forced to confront the MES criteria as soon as a respondent officially requests it in a trade case.

The E.U. will likely make a final decision on China MES well before December 11, 2016, as they do not have a “MES criteria test” on the legal books and cannot wait until an official request via a trade case comes along.

Latest Trade Developments

Many traditional anti-dumping and countervailing duties cases are still in process, alleging China has subsidized or dumped everything from metals to chemicals. U.S. Commerce recently placed final import duties of 265.79% on all investigated Chinese producers of cold-rolled steel because none of them responded to requests for information during the investigation. Commerce also placed a preliminary countervailing duty rate of 210.50% on Chinese cut-to-length steel plate.

There are also still ongoing intellectual property theft cases being investigated under Section 337 of U.S. trade law involving allegations by U.S. companies such as U.S. Steel, Allegheny Technologies, Inc. Alcoa, Inc. and the U.S. branch of multinational SolarWorld AG.

The Million-Dollar Question

U.S. Aluminum Industry vs. China

How can the world bring China and its developing economy into a proper place within the WTO and the global trade ecosystem, while preserving jobs, economic prosperity and security for Western trading partners?

Source:Ezio Gutzemberg/Adobe Stock

How will the U.S-China tussle over trade end up?

That's a complex question that has no easy answer. International politics and trade economics intertwine to make China's market economy status a highly sensitive issue for the United States to deal with. While certain U.S. industries, such as steel, stand to lose the most, other sectors see China as a necessary business partner. Manufacturers in the Midwest, for example, have been partnering with Chinese companies for years. In fact, a Michigan company is looking to open a production facility in that state — along with 150 new jobs — dedicated to produce and export powdered milk to China.

“There are lot of factors that go into the mosaic that makes up our economic relationship with China,” Scott Paul of AAM conceded. “I don’t expect extreme rhetoric from the U.S. administration [on the MES decision], but I do think they’re going to follow the law.”

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You will indemnify and hold Company, its subsidiaries, affiliates, licensors, content providers, service providers, employees, agents, officers, directors, and contractors (hereinafter known as the “Indemnified Parties”) harmless from any breach of these Terms of Use by you, including any use of Content other than as expressly authorized in these Terms of Use. You agree that the Indemnified Parties will have no liability in connection with any such breach or unauthorized use, and you agree to indemnify any and all resulting loss, damages, judgments, awards, costs, expenses, and attorney’s fees of the Indemnified Parties in connection therewith. You will also indemnify and hold the Indemnified Parties harmless from and against any claims brought by third parties arising out of your use of the information accessed from this site.

Trademarks

Trademarks, service marks, and logos appearing in this site are the property of Company or the party that provided the trademarks, service marks, and logos to Company. Company and any party that provided trademarks, service marks, and logos to Company retain all rights with respect to any of their respective trademarks, service marks, and logos appearing in this site.

Information You Provide

You may not post, send, submit, publish, or transmit in connection with this site any material that:

you do not have the right to post, including proprietary material of any third party;

advocates illegal activity or discusses an intent to commit an illegal act;

seeks to exploit or harm children by exposing them to inappropriate content, asking for personally identifiable details or otherwise;

infringes any intellectual property or other right of any entity or person, including violating anyone’s copyrights or trademarks or their rights of publicity;

violates any law or may be considered to violate any law;

impersonates or misrepresents your connection to any other entity or person or otherwise manipulates headers or identifiers to disguise the origin of the content;

advertises any commercial endeavor (e.g., offering for sale products or services) or otherwise engages in any commercial activity (e.g., conducting raffles or contests, displaying sponsorship banners, and/or soliciting goods or services) except as may be specifically authorized on this site;

solicits funds, advertisers or sponsors;

includes programs which contain viruses, worms and/or Trojan horses or any other computer code, files or programs designed to interrupt, destroy or limit the functionality of any computer software or hardware or telecommunications;

disrupts the normal flow of dialogue, causes a screen to scroll faster than other users are able to type, or otherwise act in a way which affects the ability of other people to engage in real time activities via this site;

includes MP3 format files;

amounts to a ‘pyramid’ or similar scheme;

disobeys any policy or regulations established from time to time regarding use of this site or any networks connected to this site; or

contains hyperlinks to other sites that contain content that falls within the descriptions set forth above.

Although under no obligation to do so, our Company reserves the right to monitor use of this site to determine compliance with these Terms of Use, as well the right to remove or refuse any information for any reason. Notwithstanding these rights, you remain solely responsible for the content of your submissions. You acknowledge and agree that neither Company nor any third party that provides Content to Company will assume or have any liability for any action or inaction by Company or such third party with respect to any submission.

Security

Any passwords used for this site are for individual use only. You will be responsible for the security of your password (if any). Company will be entitled to monitor your password and, at its discretion, require you to change it. If you use a password that Company considers insecure, Company will be entitled to require the password to be changed and/or terminate your account.

You are prohibited from using any services or facilities provided in connection with this site to compromise security or tamper with system resources and/or accounts. The use or distribution of tools designed for compromising security (e.g., password guessing programs, cracking tools or network probing tools) is strictly prohibited. If you become involved in any violation of system security, Company reserves the right to release your details to system administrators at other sites in order to assist them in resolving security incidents. Company reserves the right to investigate suspected violations of these Terms of Use.

Company reserves the right to fully cooperate with any law enforcement authorities or court order requesting or directing Company to disclose the identity of anyone posting any e-mail messages, or publishing or otherwise making available any materials that are believed to violate these Terms of Use.

BY ACCEPTING THIS AGREEMENT YOU WAIVE AND HOLD HARMLESS COMPANY FROM ANY CLAIMS RESULTING FROM ANY ACTION TAKEN BY COMPANY DURING OR AS A RESULT OF ITS INVESTIGATIONS AND/OR FROM ANY ACTIONS TAKEN AS A CONSEQUENCE OF INVESTIGATIONS BY EITHER [COMPANY] OR LAW ENFORCEMENT AUTHORITIES.

Miscellaneous

These Terms of Use will be governed and interpreted pursuant to the laws of the State of Illinois, United States of America, notwithstanding any principles of conflicts of law. You specifically consent to personal jurisdiction in Illinois in connection with any dispute between you and Company arising out of these Terms of Use or pertaining to the subject matter hereof. The parties to these Terms of Use each agree that the exclusive venue for any dispute between the parties arising out of these Terms of Use or pertaining to the subject matter of these Terms of Use will be in the state and federal courts in Illinois. If any part of these Terms of Use is unlawful, void or unenforceable, that part will be deemed severable and will not affect the validity and enforceability of any remaining provisions. These Terms of Use constitute the entire agreement among the parties relating to this subject matter. Notwithstanding the foregoing, any additional terms and conditions on this site will govern the items to which they pertain. Company may revise these Terms of Use at any time by updating this posting.